chapter 11 the aggregate demand/aggregate supply model

aggregate demand (AD)- the amount of total spending on domestic goods and services in an economy

aggregate demand (AD) curve- the total spending on domestic goods and services at each price level

aggregate demand/aggregate supply model- a model that shows what determines total supply or total demand for the economy, and how total demand and total supply interact at the macroeconomic level

aggregate supply (AS)- the total quantity of output (i.e. real GDP) firms will produce and sell

aggregate supply (AS) curve- the total quantity of output (i.e. real GDP) that firms will produce and sell at each price level

full-employment GDP- another name for potential GDP, when the economy is producing at its potential and unemployment is at the natural rate of unemployment

intermediate zone- portion of the SRAS curve where GDP is below potential but not so far below as in the Keynesian zone; the SRAS curve is upward-sloping, but not vertical in the intermediate zone

Keynesian zone- portion of the SRAS curve where GDP is far below potential and the SRAS curve is flat

Keynes’ law- “demand creates its own supply”

long run aggregate supply (LRAS) curve- vertical line at potential GDP showing no relationship between the price level for output and real GDP in the long run

neoclassical economists- economists who generally emphasize the importance of aggregate supply in determining the size of the macroeconomy over the long run

neoclassical zone - portion of the SRAS curve where GDP is at or near potential output where the SRAS curve is steep

potential GDP- the maximum quantity that an economy can produce given full employment of its existing levels of labor, physical capital, technology, and institutions

Say’s law- “supply creates its own demand”

short run aggregate supply (SRAS) curve- positive short run relationship between the price level for output and real GDP, holding the prices of inputs fixed

stagflation - an economy experiences stagnant growth and high inflation at the same time